INVESTMENT PROCESS

Tygh Capital’s investment process uses a team-oriented approach, where members of the team leverage the expertise of their colleagues in an environment that facilitates the exchange of ideas and insights.  Each investment team member is involved in all four steps of the investment process.

1.    Idea Generation

  • The investment universe is screened for characteristics consistent with Tygh’s investment criteria including 15% revenue and earnings growth, expanding operating margins, and strong operating cash flow.

 

  • Previously owned companies are a source of ideas that leverages prior experience and knowledge base.

 

  • Company management meetings offer opportunities to monitor existing holdings and prospect for new ones.  The investment team visits with company managements in our offices, at conferences or at company locations.

 

  • Observation of market trends focuses research into sectors or industries that are expected to experience superior relative growth.

  

Goal:  Identify companies for further analysis.

 

2.    Research and Analysis

 

  • Stock ideas undergo in-depth, fundamental analysis in order to validate at least 15% annual revenue and earnings growth. 

 

  • Portfolio Managers examine the growth of the addressable market, trends in the company’s market share and trends in operating margins and expenses.

 

  • With a strong emphasis on the quality of earnings, the team evaluates trends in operating cash flow to ensure they support the company’s reported net income. 

 

  • Once a company’s fundamentals have been examined and validated, the stock only becomes an investment candidate for the portfolio if the team believes it has a sustainable valuation.  To reach that determination, the team reviews a variety of historical and comparable valuation metrics [P/E, enterprise value/EBITDA, price to sales and cash flow, return on invested capital] to calculate a price target.

Goal:  Identify strong risk reward candidates for the portfolio, with at least 20% upside to its price target.

 

3.    Portfolio Construction 

 

  • With a list of high conviction stocks in place, account portfolios are constructed based on client objectives and guidelines. 

 

  • Initial position sizes are between 75bps and 150bps for small cap portfolios & 100bps and 175bps for smid cap portfolios. 

 

  • Maximum position sizes for both small and smid cap portfolios are 4% with the total number of positions in the portfolio between 80 and 100 stocks.

 

  • Strict liquidity constraints based on average daily trading volume and percentage ownership of a company’s float are considered when initial position sizes are determined.

  • Sector concentrations are generally within +/- 10% of the Russell 2000 Growth Index weightings.

Goal:  Construct a well balanced portfolio with strong risk/reward potential.

4.    Risk Management

 

  • Daily review of the portfolio sector weighting limits, as well as ongoing review of client guidelines and pre/post trade compliance checks. 

 

  • Weekly review of portfolio positions to ensure liquidity constraints are maintained.

 

  • Continuous review of the price target and investment thesis on each stock.  The investment team sells a stock when the security exceeds its price target, the original investment thesis is broken, or a better investment idea is generated. 

  • The sell criteria list is generated to review stocks identified as poor performers based on a proprietary 10-point quantitative system that considers various price and fundamental-based factors.

  • Weekly investment team meetings are held to review the sell criteria list.  This review mitigates the emotional influence on the sell or hold decision. 

 

  • Stocks identified are subjected to a comprehensive review to determine whether or not the stock continues to meet the original investment criteria.  The security continues to be reviewed as long as the stock remains on the list.

Goal:  Maintain an optimized portfolio that seeks to maximize return while controlling risk.